[2021 Financial Sector Review] Card and Savings Banks Show Strong Performance Despite COVID-19... "Next Year's Fees and Loan Regulations Are Key"

2021 Financial Sector Review ③ Card & Savings Banks
Profit Amid Recession & Loan Regulation Balloon Effect
Gloomy Outlook for Next Year... Concerns Over Profitability Decline

[Asia Economy Reporters Ki Ha-young and Song Seung-seop] The secondary financial sector, including credit card companies and savings banks, achieved strong growth and good performance this year despite COVID-19. However, with household loan regulations tightening and card fees being reduced from next year, worsening business conditions have led them to struggle to find ways to maintain profitability.

Financial Services Commission Chairman Ko Seung-beom is delivering opening remarks at the ruling party-government consultation on card fee reform held at the National Assembly on the 23rd. Photo by Yoon Dong-joo doso7@

Credit Card Companies: Good Performance Turns into a 'Boomerang' Due to Fee Reductions

This year, credit card companies recorded counter-cyclical profits amid the COVID-19 impact. This was due to reduced marketing and bad debt expenses and increased online payments. The cumulative net profit of eight specialized credit card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana, and BC) for the first three quarters of this year (2.2269 trillion KRW) increased by 32.2% compared to the previous year, already surpassing last year's net profit (2.0607 trillion KRW).

However, this strong performance became a pretext for further reductions in merchant fees during the triennial card merchant fee reassessment. This is the 14th reduction since 2007. Under this fee revision, the fee rate for small merchants with annual sales under 300 million KRW dropped from 0.8% to 0.5%. For annual sales between 300 million and 500 million KRW, the rate decreased from 1.3% to 1.1%; for 500 million to 1 billion KRW, from 1.4% to 1.25%; and for 1 billion to 3 billion KRW, from 1.6% to 1.5%. The actual reduction amount is 470 billion KRW. Credit card companies, already operating at a loss in their core credit sales business, will inevitably face worsening profitability. Although the intention is to ease the burden on small business owners and micro-entrepreneurs struggling due to COVID-19, critics argue that this is a political move to twist the arms of credit card companies ahead of the presidential election to win votes.

Credit card companies, which are running deficits in credit sales, compensated for profitability this year through long-term card loans (card loans). As of the first half of this year, the card loan assets of seven specialized credit card companies (excluding BC Card) surged by 14.6% year-on-year to 34.1311 trillion KRW. However, financial authorities, closely monitoring household debt management, have put the brakes on this rapid increase, prompting credit card companies to manage card loans in the second half of the year. From next year, the Debt Service Ratio (DSR) will be applied to card loans due to strengthened household loan regulations.

Competition with big tech companies such as Naver Pay and Kakao Pay for leadership in the future payment market was also fierce this year. As of the third quarter, Naver Pay's payment volume approached that of small and medium credit card companies (Lotte, Woori, Hana Card). In response, credit card companies built an open pay system allowing their applications to register and use cards from other companies. Additionally, they provided payment networks for government support projects such as the Win-Win National Support Fund and Win-Win Consumption Support Fund to help overcome COVID-19.

Chaotic Secondary Financial Sector... Dark Outlook for Next Year

Savings banks are also widely regarded as having posted good results this year. After starting operations with nearly 80 trillion KRW in deposits 10 years after the savings bank crisis at the end of last year, they are now on the verge of surpassing 100 trillion KRW as of the end of October. During the same period, loans increased significantly from 77.6675 trillion KRW to 95.5783 trillion KRW, a rise of 17.9108 trillion KRW (23.0%).

This is largely interpreted as a balloon effect due to loan regulations imposed on commercial banks. At the beginning of this year, financial authorities ordered commercial banks to manage household loan growth rates at around 5%. Although savings banks were also subject to total volume regulation, their limit was relatively generous at 21.1%, compared to the primary financial sector. Analysts suggest that high-credit borrowers, blocked from loans at commercial banks due to ongoing demand for funds, flocked to savings banks.

Many forecasts predict a slowdown in performance next year. This is because the total volume regulation level for savings banks will be reduced by nearly half. Next year, the total household loan volume for savings banks is expected to be only 10.8% to 14.8% per institution. Increased competition in the mid-interest rate market is also a negative factor. Savings banks were virtually the sole providers in the mid-interest loan market, but recently internet-only banks and online investment-linked finance companies (On-tu-eop) have been aggressively targeting this market. Even commercial banks have recently shown interest in the mid-interest rate market.

Mutual finance sectors (credit unions, Nonghyup, Suhyup, Forestry Cooperatives, and Saemaeul Geumgo) experienced a chaotic year. Early this year, Buksiheung Nonghyup was implicated in a real estate speculation scandal involving employees of the Korea Land and Housing Corporation (LH), putting the entire mutual finance sector under scrutiny. There were criticisms that, due to relatively lax regulations, moral hazard was widespread and the proportion of loans to non-members was excessively high, contrary to the original purpose.

In the second half of the year, the loan total volume, which had been relatively well managed, reached its limit due to the balloon effect, causing repeated suspensions and resumptions of operations. Nonghyup stopped jeonse loans and mortgage loans for non-members and quasi-members at the end of July; Suhyup and Forestry Cooperatives halted household loans in October; and Saemaeul Geumgo and credit unions closed household loan counters at the end of November.

The loan business sector was severely contracted due to the reduction of the legal maximum interest rate. According to the industry, loan balances have decreased by about 3 trillion KRW over two years, and users have halved compared to the peak at the end of 2015. Professor Seo Ji-yong of Sangmyung University’s Department of Business Administration pointed out at last month’s Korea Loan Finance Association Consumer Finance Conference that "the loan business has suffered deteriorated profitability and loan business conditions due to strengthened regulations such as the reduction of the maximum interest rate being implemented across the financial sector."